Although it seems that the scars of the Global Financial Crisis (GFC) are finally healed, the GFC resulted in a ‘lost decade’ as consumer confidence remained subdued and corporate as well as sovereign balance sheets have taken time to recover and repair. We expect that the global recovery that began at the end of 2016 will likely gain momentum and breadth in 2018, supported by continuing accommodative monetary policy and low inflationary expectations.
With the world’s major economies at different stages of the business cycle, the risk of the global economy overheating is limited. This is due to the fact that there is still a large amount of overcapacity in many industries and technological innovation, as well as constant disintermediation, is lowering cost curves and the intensity of use of materials. The ‘Amazonification’ of cost curves across all industries globally continues.
As evidence of the recovery being ‘stronger-for-longer’ materialises, signs of a shift away from secular stagnation are starting to emerge. Stronger investment spending, faster productivity growth and falling risk aversion point to a gradual increase in long-term growth and equilibrium interest rates.
Furthermore, upwardly revised US and Eurozone growth forecasts push the IMF’s global GDP growth forecasts to 3.9% in 2018 and to 3.8% in 2019, the highest expectations in a decade. In line with our view, strong momentum into year-end elsewhere, boosting carried over growth, underscores the near-term upside risks to global growth estimates as we expect global growth of around 4% and higher.
As the recovery gains momentum and labour markets push beyond full employment with manufacturing companies operating above their capacity utilisation of the past decade, the focus will turn to inflation. Key inflationary indicators will increasingly be scrutinised for signs of overheating, with the US Treasury yield curve a key determinant of global asset prices and a ‘risk-on’ environment. We are encouraged by the increased global confidence that is reviving investment spending, rising productivity growth and declining corporate savings, which should cause a gradual shift away from secular stagnation.
This positive shift away from the stagnation of the last decade is highly supportive for the sustainability of the current recovery and for the terminal rate of the monetary policy cycle being lower than initially expected, as well as for the long-term growth expectations embedded in market valuations being justified at their current excessive levels. Overall, the global economic outlook is positive barring geopolitical shocks.
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